A cynical commentary about developments in the South African financial markets and the incomprehensible activities and pronouncements of bureaucrats and politicians.

Friday, 8 July 2016

SWEATING THE SMALL STUFF

Almost nothing that is happening
supposedly in reaction to Britain’s vote to leave the EU was expected by the
chattering classes. Certainly not that the next prime minister will be a woman!
Nor that USD denominated assets would be the main beneficiary of what is
presumably being seen as a flight to safety. The yield on the US 10-year bond
is moving steadily lower and the price of gold is moving steadily higher. The
first of these trades might unwind spectacularly when the awful reality of who
might next get their knees under the desk in the Oval Office starts to dawn.
The JSE is more or less unmoved by any or all developments anywhere and as yet
there has been no price reaction to the considerable round of earning decreases
announced in the past few months.

To a surprising extent, financial
and economic analysis use data which are the small differences of large
numbers.Scientists tend to be wary of
putting too much faith in this sort of data but our industry happily draws important
and sweeping conclusions from information which is statistically not very
robust. Undoubtedly if the degree of uncertainty in the source data of economic
statistics could be determined and taken into account then the supposed short
term trends on which so much bandwidth, airtime and printing ink is spent, will
mostly all evaporate. Furthermore, particularly for raw data gathered by state
agencies, the numbers relate to periods long past and probably have little
bearing on what is happening on day of publication and into the future. A very
good example of a data set compromised by the many inherent timing, collection
and processing sources of error is also the largest and most scrutinised of
them all. The Gross Domestic Product (GDP to its friends) of South Africa is
now almost exactly R4 trillion per annum. Allegedly several years of expensive academic
study are necessary to understand what this number actually means and
represents, but this doesn’t deter anyone else in need of an opinion from
pecking away at the keyboard and spreadsheet.

The key metric is of course the
rate at which this GDP number changes. Increases are good, decreases are bad. And
this week the IMF suggested that SA would see growth of just 0.1% in 2016. Now
that is a mighty small difference (about R3bn after removing the (assumed)
effect of inflation). Barely the cost of
a new presidential jet and far less than the amount Eskom have asked the
taxpayer for in order to make ends meet. But it is positive, and so sighs of
relief all round. What nonsense. The sole target is for economic growth which
is undeniably and substantially greater than population growth. We need big
differences.

There is way too much government
happening here on the southern tip. Public sector expenditure is almost a third
as large as the nation’s GDP, but is poorly allocated and prioritised. Minister
Blade Nzimande has been told that it is not possible to accede any longer to the
demands of the “#FeesMustFall” campaign and is muttering about inflation-linked
fee increase for university students. This will likely pave the way for another
round of protests getting underway as the end of year exam season approaches and
students look for something to do other than swotting.

Another instance of small
differences of large numbers has been evident this week where stages of 200km in
the Tour de France have been won by mere millimetres. Something similar might
be happening for the Lions as they edge towards the points needed to secure home
games in the Super 18 play-offs.